Business - FT.com

Markets have plunged since Congress passed the Emergency Economic Stabilisation Act (also known as Tarp). And financial institutions aren't the only ones suffering.

The "defining moment" has arrived in the evolution of the financial crisis, according to Philip Finch, global banks strategist at UBS (NYSE:UBS).

Thursday was a grim anniversary for US equities and it is becoming clear that Main Street has joined the professionals in running scared.

Sweden's experience during its early 1990s banking crisis has many parallels with current events and offers a "surprisingly upbeat" message for equity markets, says Tim Bond, head of global asset allocation at Barclays Capital.

What can we hold on to as share prices whizz downwards? There is ghastly truth in the market cliché that you should not try to catch a falling knife.

Bears are on top over bulls in the stock market. And the reason is that debt-holders seem to be in the ascendancy over shareholders.

Markets dislike ambiguity. On Monday it looked as though they would at last get some certainty. It was a Monday in October, like several of the most infamous stock market crashes in history; stocks' slide on Friday after Congress passed the Tarp relief plan showed that even that dramatic stroke had not assuaged sentiment; the weekend news from Europe was terrifying; and, the selling in Asia and Europe suggested the long-awaited "crash" had come.

"Crash" is a sensitive word in markets. By common consent, there have only been two in the stock markets of the developed world: in October 1929 and October 1987. Must we now add October 2008 to the list?

Short selling may be out of favour, widely blamed as one of the most dangerous of the unregulated excesses of market capitalism, but China's stock market regulators are apparently not worried by that.

The events of the last few weeks culminating in Monday's dramatic stock market falls have changed the financial world in a way few would have thought possible.

The price of copper capped a torrid third quarter on Friday with the second largest weekly fall for the benchmark London Metal Exchange three-month contract, 11.8 per cent to $5,977.5 a tonne.

The need for General Electric, long regarded as the gold standard of corporate credit quality, to raise $15bn in capital to quell concerns about its financial health is the starkest evidence yet that the credit crunch is hitting companies big and small.

In the over-the-counter derivatives markets, the great clear-up seems to be gathering pace.

The start of the fourth quarter on Wednesday eased some of this week's surge in overnight funding rates, but was unable to thaw the freeze in longer term lending.

The recent collapse of global financial institutions and severe malfunctioning of the inter-bank lending markets have fuelled concerns over the fallout from a systemic banking crisis, but should not spark a run on the dollar, says Lee Hardman at Bank of Tokyo-Mitsubishi UFJ.

The US Congress's rejection of Treasury secretary Hank Paulson's Tarp initiative means that global recession is inevitable and the credit crisis will get worse. The risk of systemic financial failure has risen, but we expect all major financial institutions to be saved in case of necessity. While worsening credit conditions, global liquidity contraction and global recession were already our forecast, they will now become everyone's.

Within the past few weeks the financial crisis that started more than a year ago has deepened by several orders of magnitude. In spite of unprecedented governmental and central bank interventions in the US and elsewhere, some elements of the financial intermediation process are dysfunctional. This environment has given rise on Wall Street and Main Street to an atmosphere of fear and uncertainty.

Lending between investors and financial institutions remained at a standstill on Monday, as the end of the third quarter and further global banking problems was compounded by US lawmakers failing to pass the Treasury's $700bn plan to purge the system of toxic assets.

Writing anything about this financial crisis is nerve-racking. People may be reading how financial journalists wrote about this crisis decades from now, and things we now accept as unquestioned orthodoxy may come to be ridiculed. I am acutely conscious of this as I covered Washington Mutual (NYSE:WM) for the Financial Times in the late 1990s.

The Merrill Lynch executives who took the decision to sell off a bunch of complex mortgage-related debt assets at about 22 cents in the dollar during the summer could have good reason to feel peeved once the US market bail-out plan is finalised.

Money market conditions deteriorated further on Thursday illustrating the complete breakdown in lending among investors and banks.

Markets on Wednesday reflected two different realities. Equity markets behaved with what could almost be called calm; credit markets returned to the historic distress seen last week.

Warren Buffett's purchase of a $5bn stake in Goldman Sachs (NYSE:GS) is a more powerful message to the market than Hank Paulson's proposed $700bn bailout, and supports the view that stocks finally offer good value, says Charles Dumas at Lombard Street Research.

By late morning in New York on Monday, the price of oil had climbed by 20 per cent in barely five days and scarcely anyone had noticed. Then it went into overdrive, hitting $130 at one point before settling at $120.92. Last Tuesday, it traded at $90.51 - a swing of 44 per cent from bottom to top.

The price of oil has risen 20 per cent in the past five days and barely anyone noticed. That is because oil's upheaval is little more than a residual of the financial crisis.

Despite the enormity of current challenges, if there was ever a good time for the US, and the world, to face these remarkable challenges, this is it. That is because of the extent to which consumption in the leading emerging market economies - Brazil, Russia, India and China (BRIC) countries - should be able to offset the slowdown in the US.

Investors hoping that the US government's proposed $700bn Troubled Asset Relief Program to buy banks' toxic assets will signal a bottom for equities may be disappointed, says David Rosenberg, north American economist at Merrill Lynch.

After Friday's record breaking rally it is tempting to think the worst is over for the UK equity market. But is it? Or is there further pain ahead?